US & World Daily Markets Financial Briefing 17-08-2007

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Stocks jump on discount rate cut

NEW YORK - Stocks soared Friday, propelling the Dow Jones industrials up more than 300 points, after the Federal Reserve, acknowledging that the stock market's plunge posed a threat to the economy, slashed its discount rate by a half percentage point.
   
The central bank's step -- a move Wall Street was angling for -- gave the market a boost after weeks of losses fueled by turmoil in the credit markets. The Fed has poured billions in additional liquidity into the banking system in recent days, but Friday's rate cut marked its most dramatic effort yet to alleviate fears about tightening credit and calm the global financial markets.
   
The Fed cut the discount rate to 5.75 percent from 6.25 percent, declaring that "downside risks" to the economy have increased appreciably.
   
However, the central bank did not change its target for the federal funds rate, which has remained at 5.25 percent for more than a year. Many strategists believes the market won't settle down until the Fed lowers the fed funds rate -- the rate banks charge each other on overnight loans. The discount rate only covers loans the Fed makes to banks.
   
It was too early to tell how much of the buying was a relief rally after weeks of losses, and whether the gains would stick. The market has quickly given back any advances it has scored in recent weeks amid growing signs of problems in the credit markets.
   
For investors, the question is whether the discount rate cut is a signal that the Fed is seriously leaning toward cutting the fed funds rate, considered a more important benchmark, at its next meeting on Sept. 18.
   
In the first hour of trading, the Dow Jones industrial average surged 315.56, or 2.46 percent, to 13,161.34. The Standard & Poor's 500 index rose 37.00, or 2.62 percent, to 1,448.27, and the Nasdaq composite index rose 73.89, or 3.01 percent, to 2,524.96.
   
Bonds fell, with the yield on the benchmark 10-year Treasury note rising to 4.70 percent from 4.66 percent late Thursday.
   
Gains were seen in all sectors of the stock market, but battered financial stocks, hurt by growing problems in mortgage lending, saw the most buying. All of the 30 Dow companies rose in early trading, with Citigroup Inc. and JPMorgan Chase & Co. posting the biggest increases.
   
Major European indexes recovered substantially after the Fed's announcement from steep declines in earlier trading. Britain's FTSE 100 rose 3.43 percent, Germany's DAX index rose 2.82 percent, and France's CAC-40 rose 3.13 percent.

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Dollar falls as Fed cuts discount rate

LONDON - The dollar fell after news that the Federal Reserve has cut its discount rate by 50 basis points to 5.75 pct from 6.25 pct in order to help inject liquidity into the market.
   
In a statement, the Fed said the move was designed "to promote the restoration of orderly conditions in financial markets".
   
By 1.23 pm BST, the euro had risen to 1.3509 against the dollar, up from 1.3465 usd previously, while the pound rose to 1.9881 usd from 1.9815 usd previously.

The yen reversed some of its earlier steep across-the-board gains after hitting a fresh 14-month low against the US dollar, with analysts citing Japanese investor buying and speculation of possible Bank of Japan intervention.
   
The yen has witnessed sharp increases in recent days as the credit crunch crisis sparked a massive flight from risk and caused carry trades to unwind. Carry trades are a risky strategy -- popular until recently -- where money is borrowed in low-yielding currencies in order to invest in higher-yielding assets elsewhere.
   
Given the level of risk aversion that has flooded the market, however, any rebound is unlikely to be maintained, merely encouraging investors to move back in and buy the yen on dips.
   
"The inability to sustain the highs is not a reflection of the yen but more a reflection of the volatile markets we currently trade within," said Matthew Foster-Smith at Thomson IFR Markets.
   
Analysts also noted speculation that the Bank of Japan could intervene to stem the yen's rise. Reports have already emerged that the BoJ could hold off from raising interest rates again for the time being.
   
"In the short-term, yen weakening intervention has become a strong possibility as it would help stabilising international capital markets and would  allocate liquidity to where it is mostly needed," BNP Paribas analysts said.
   
The reversal of the yen's gains also allowed some reprieve for high-yielding currencies, including the Australian dollar and the pound, but this again is expected to be short-lived.
   
"While the sharp sell-off over the last two days imply that a bounce in the pair (Australian dollar/US dollar) is possible, investors seem nervous and happy to unwind their long Australian dollar positions," BNP Paribas said.
   
The Australian dollar's steep declines over recent days have prompted action by the Reserve Bank of Australia, which announced it had intervened to stem the losses. RBA governor Glenn Stevens said intervention was small and that the central bank is prepared to intervene "from time to time" if conditions are "disorderly".

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Euroshares lower midday, cautious trade ahead of Wall Street open

LONDON - Leading European exchanges turned lower midday as investors laid low, fearing another sell off on Wall Street ahead of the weekend and after massive losses in Japan overnight.
   
At 12.09 pm, the Dow Jones STOXX 50 was 13.91 points, or 0.39 pct, lower at 3,532.76 as the DJ STOXX 600 fell 2.08 points, or 0.59 pct, to 350.29.
   
"Grey Friday, black Monday," one trader said. "We are worried. Worried that the desolate performance in Asia acts as the finger on the trigger for Wall Street today," he added, noting that some will look towards shedding their exposure in the US ahead of the weekend.
   
Banks and insurers however were clawing their way back to the top of indices across Europe this morning, rebounding from recent losses, with Societe Generale leading advancers higher on the STOXX 50, up 2.19 pct. Other notable risers include Allianz which gained 1.80 pct and Unicredito, which added 1.45 pct.
   
Zurich Financial --up 0.93 pct-- received an additional boost earlier as WestlB upgraded the Swiss insurer to 'buy' from 'add,' with a price target of 425 sfr. Its price objective is some 30 pct above Zurich's current share price.
   
On M&A news, OMX was in the spotlight this morning, after a 230 skr cash bid by Borse Dubai earlier. Shares fell 0.44 pct, however, as traders doubted that Nasdaq will come in with a counter bid after its 208 skr offer which is still outstanding.
   
On the earnings front, shares in Hagemeyer fell 13.55 pct after its latest in-line quarterly results failed to inspire, with some traders also pointing to a disappointing operating profit. In addition, CEO Rudi de Becker addressed recent market takeover speculation, with peer Rexel mentioned as a potential buyer.

According to De Becker, Hagemeyer is "absolutely not for sale." The industrial supplier said operating profit rose 13 mln eur to 78 mln eur from a year ago.
   
Later in the afternoon, investors are set to cast an eye towards the University of Michigan consumer confidence index, which is seen dropping to 87.5 for the preliminary August survey from 90.4 in July.
   
"It will surprise no one if the first round of polling for the University of Michigan survey exposes a big drop in consumer sentiment," says Roger Kubarych at UniCredit.

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Indian shares closed lower after a choppy session, but pared losses on late interest in shares of HDFC Ltd and Reliance Industries Ltd.
   
The Bombay Stock Exchange's benchmark Sensex closed down 1.51 pct, or 216.69 points, at 14,141.52, while the National Stock Exchange's S&P CNX Nifty dropped 1.69 pct to 4,108.05 points.
   
Earlier, the Sensex had been routed to a low of 13,779.88, a fall of over 4 pct for the day, as selling reached a crescendo tracking the sell-off in other Asian markets, especially Japan. 
  
Thai share prices closed up 1 percent Friday, bucking the trend around the region as investors searched for bargains after heavy losses triggered by the US property loan crisis.
   
Investors mainly snapped up banking and energy-linked shares. The Stock Exchange of Thailand (SET) composite index rose 7.73 points to 758.42 and the blue-chip SET 50 index increased 5.65 points to 537.70.
    
Gainers led decliners 259 to 117, with 86 stocks unchanged. Turnover totaled 3.2 billion shares worth 23.6 billion baht (683 million dollars). The Thai baht closed at 34.50-55 to the dollar, little moved from Thursday's finish. Against the euro, the Thai currency was quoted at 46.35-42 from 46.11-27.

Hong Kong share prices closed off their lows Friday as some late bargain-hunting in blue chips helped the benchmark Hang Seng index recover some of its earlier heavy losses. With the Hang Seng index sliding over 1,000 points early in the afternoon, some investors thought the selling was overdone and sought out bargains.
   
The 39-stock Hang Seng Index closed down 285.26 points or 1.4 percent at 20,387.13, off a low of
19,386.72.

Singapore share prices finished Friday lower but off their lows as bargain-hunting emerged in late afternoon after a key support level was breached. Investors started to hunt for bargains late afternoon when the benchmark Straits Times index (STI) fell below the psychological support level of 3,000 points.
   
The STI was down 21.45 points or 0.70 percent at 3,130.71, after moving between 2,962.01 and 3,179.03. The index was down 6.8 percent for the week and has fallen some 15.6 percent from its peak of 3,688.58 reached on July 16. Volume traded was 3.61 billion shares valued at 3.88 billion Singapore dollars. Losers led gainers 827 to 219, with 591 stocks unchanged.

China A-shares closed lower as investors continued to sell to avoid risk from the turbulence in global markets over the US mortgage crisis, dealers said. Financial stocks, particularly those listed on both the domestic market and in Hong Kong, accelerated their falls after Hong Kong's Hang Seng Index widened
losses and fell 6 pct in late trade.
   
The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, closed down 108.87 points or 2.28 pct at 4,656.57. Turnover rose to 133.78 bln yuan from 128.30 bln yuan in the previous session. The index lost 1.95 pct this week after it had gained 21 pct over the past four weeks.

South Korean share prices closed sharply lower Friday after fear of a global credit squeeze continued to dishearten investors following Thursday's unprecedented crash.
   
The KOSPI index fell 53.91 points or 3.2 percent to close at 1,638.07, after moving between 1,626.87 and 1,705.17. The main index has now fallen by more than 18 percent from the all-time high it reached on July 25.
  
Investors were further discouraged towards the close as the decline in Japanese share prices got steeper amid the strengthening of the yen. Tokyo's benchmark Nikkei 225 Stock Average closed 5.4 percent lower.

Australian shares closed a volatile session lower on Friday, marking a fourth consecutive daily decline, as fears about the impact of tighter global credit in the wake of the US subprime mortgage crisis continue to weigh heavily on sentiment.
   
Comments from Reserve Bank of Australia (RBA) governor Glenn Stevens earlier in the day, that the global economy will be able to weather the current credit problems failed to cast aside the pall of gloom hanging over the market, as investors continue to exit equities in search of less risky investments.
  
The S&P/ASX 200 closed down 40.5 points or 0.7 percent at 5,671.0, after trading between 5,637.4 and 5,788.2. Over the week, the benchmark index lost 265 points or 4.5 percent. The All Ordinaries index fell 41.9 points or 0.7 percent to settle at 5,670.3.
   
Losers beat gainers 712 to 642, with 273 stocks unchanged. Volume was 2.65 billion shares worth 8.65 billion Australian dollars. The S&P/ASX200 September futures contract fell 68.0 points to 5,632.0.

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Gold spikes higher as Fed Reserve Board credit rate cut hurts dollar

LONDON  - Gold rose sharply in early afternoon trade after the Federal Reserve Board announced it has cut its discount rate on loans to banks in response to the current crisis in the global credit markets, knocking the dollar.
   
The board approved a 50 basis point reduction in the primary credit rate to 5-3/4 pct, saying increased economic uncertainty illustrated by the sharp falls seen in share prices in recent days poses risks for US business growth.
   
The news sent the dollar lower, consequently boosting gold. Immediately after the move was announced the euro rose to 1.3509 against the US currency, up from 1.3465 usd previously, while the pound rose to 1.9881 usd from 1.9815 usd previously.
   
The precious metal is typically seen as an alternative investment to the dollar and moves in an inverse relationship to it.
   
At 1.45 pm, spot gold was trading at 659.33 usd an ounce against 648.20 usd in late New York trade yesterday, having earlier reached an intraday high of 660.23 usd.
   
"The dollar (weakening) is definitely the first factor here," said Jon Nadler, an analyst at Kitco Bullion Dealers. "Although we would have to expect a bounce after yesterday's washout."
   
Gold was trading steadily earlier near 650 usd an ounce after tumbling by 3 pct yesterday as the large sell-off in equities forced funds out of the precious metal.
   
Commodities fell across the board as lower equities saw traders sell off to cover losses elsewhere and flee risky markets, like oil, metals and even gold, which is a traditionally a safe haven asset.
   
The market is continuing to watch moves in global equities today, after a late turnaround on Wall Street Thursday pared some of gold's losses. A rebound in European share prices today and an expected higher opening on the New York stock market is supporting sentiment.
   
Gold prices tend to rise in line with oil, as the precious metal is used as an inflationary hedge against rising fuel costs.
   
The approach of the Indian wedding season, where gold jewellery is a traditional gift, could lend some support to gold, as jewellers look to restock at lower prices, analysts said.
   
Among other precious metals, silver traded at 11.80 usd against 11.53 usd, after losing almost 1.50 usd yesterday. Platinum was up to 1,244 against 1,234 usd while palladium dipped to 329 usd from 331 usd.

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